Unleashing Restraint

Health reform won't stop costs from rising in the short term, but it lays the groundwork for long-run control of spending.

Smewhere along its tortuous path to enactment, health-care reform turned into health-insurance reform. Providing coverage to 34 million Americans and eliminating the unsavory practices of the insurance industry are major achievements. To pass the Affordable Care Act, however, reformers had to give up their grander aspirations. As a result, the legislation won't do much to change the health care most Americans receive or to slow the overall growth in health costs in the short term. It does, however, create new opportunities for long-term cost containment, and the challenge will be to make the most of those opportunities.

The Affordable Care Act is fully financed: The additional costs to the federal government are more than offset by a combination of new revenues and compensating cuts in expenditures. But overall health costs to society are still projected to go up. Without health reform, according to the chief actuary for Medicare and Medicaid, health expenditures would reach 20.8 percent of gross domestic product in 2019; with health reform, that percentage will rise to 21 percent. In other words, all the changes brought about by the legislation -- including an additional 34 million people insured -- are projected to raise total projected health spending by less than 1 percent in 2019 (less than $50 billion).

That seems like a pretty good deal, but it doesn't deal with health-care spending. We could do a lot better in controlling costs if we could make full use of some provisions in the new law and get moving in a few areas that the legislation doesn't touch.

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Lines of Attack

The Affordable Care Act attacks the cost problem in a variety of ways. It sets up state-based insurance exchanges to enable individuals and small businesses to buy insurance more cheaply. It provides funds to state governments to strengthen insurance-rate regulation. It imposes an excise tax on high-cost health plans to discourage employers from offering them. It creates an Independent Payment Advisory Board with some authority to reduce Medicare spending. It calls for pilot tests of some promising delivery-system and payment innovations. It seeks to speed up the adoption of electronic health records and other forms of health information technology. It finances research to help physicians and patients make more informed decisions about alternative treatment options. And it provides more support for disease-prevention and wellness programs.

The state-based insurance exchanges can produce savings by lowering the administrative costs of insurance and by creating a more competitive environment in which insurers can gain market share by offering lower-cost, quality plans rather than simply avoiding patients who need medical care.

The excise tax on high-cost plans was a contentious provision. Most health economists think that the unlimited, favorable tax treatment of employer payments for health insurance leads some employers to provide overly generous coverage and some consumers to overuse services. In the end, Congress chose to put an excise tax not on the employer contributions but rather on the "Cadillac" plans themselves. Premiums costing more than $10,200 for an individual and $27,500 for a family will be taxed 40 percent on the amount over those thresholds. The tax will not go into effect until 2018, however, and analysts expect employers to redesign the Cadillac plans to avoid or minimize the tax -- which should help restrain spending.

In an effort to promote improvements in the delivery system itself, the Affordable Care Act creates a new Center for Innovation in the Centers for Medicare and Medicaid Services (CMS). The center is expected to develop new payment approaches that reward physicians and other providers for the value, not just the volume, of their services. The center will also focus on such forms of health-care delivery as "patient-centered medical homes" and "accountable-care organizations." A medical home refers to a redesigned primary-care practice that serves as the central point of contact and coordination for patients without playing the restrictive "gatekeeper" role that has led to a backlash against managed care. Accountable-care organizations provide the full spectrum of health services through physicians and hospitals that agree to be held accountable on measures of their performance in caring for all patients, not just those who show up in their offices.

The challenge for both medical homes and accountable-care organizations is to foster the documented benefits of multidisciplinary teams and larger, coordinated systems of care without losing the personal responsiveness exemplified by physicians practicing independently or in small groups. The current CMS process for testing new delivery and payment ideas has often been slow, unwieldy, inconclusive, and unproductive.

The new Innovation Center needs to bring together all affected parties, including patients, to test promising ideas, reach consensus, and proceed to broad adoption -- all within a reasonable time -- rather than waiting for definitive proof of success. The criterion for these new models should be not whether they are perfect but whether they work better than the current fragmented system of care.

Medicare Savings

The concern that Congress doesn't have the stomach for politically difficult cost-containment measures led to a provision in the legislation creating a new Independent Payment Advisory Board. Beginning in 2014, the board will recommend Medicare spending reductions in any year when the program's costs rise faster than the average of the consumer price index and the medical-care component of that index. The board's recommendations would become law unless Congress passes an alternative proposal to achieve the same savings.

The law carefully circumscribes the payment board. It can't raise revenue or change benefits; it can only modify payment rates -- and hospitals are exempt from the board's oversight until 2020. The board will also be asked to make policy recommendations to restrain private health-care spending, but those proposals are not binding. Once in place, the board may see its authority grow if Congress otherwise proves incapable of controlling costs, at least initially for Medicare.

The surest way of achieving short-term Medicare savings is through payment cuts -- or, more accurately, reduced rates of increase in payment. In the new law, payment reductions to private health plans (which currently cover about 25 percent of Medicare beneficiaries) and to hospitals and other providers (which care for the other 75 percent in traditional Medicare) account for most of the Medicare savings. Congress made the reductions to private plans because of evidence the plans were being overpaid, and it cut the payments to providers on the assumption that they can improve productivity to the same degree as do other producers of goods and services. Moreover, the hospital industry was willing to accept the cuts after a careful analysis of the new revenue that hospitals will receive for treating millions of newly insured patients.

So there is good reason to believe that providers can absorb the payment reductions without any compromise in care provided to Medicare beneficiaries. A federal commission that advises Congress on Medicare payment and other policies has found that many hospitals make up shortfalls from treating Medicare beneficiaries by using their clout in negotiating with commercial insurers to obtain high prices for caring for privately insured patients. In short, even if hospitals are inefficient, they can tolerate losing money on Medicare.

Similarly, according to a recent study, if all payers used the Medicare fee schedule, physicians would earn an average of $240,000, with cardiologists' compensation at $450,000 and radiologists at $390,000. Those are hardly starvation wages, though they are less than what physicians make today.

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To Have and Have Not

Unfortunately, the market power of providers received virtually no attention in the health-reform debate. To point out this problem would have conflicted with the Democratic political narrative that identified the insurance companies as the health-care villains and the providers as the good guys. That framing helped to get the legislation over the finish line, especially after Anthem Blue Cross of California's inexplicably timed announcement in February of a 39 percent increase in premiums for some policies.

In California and elsewhere, however, the growing leverage of organized providers is driving up insurance premiums. Today there are tax-exempt, nonprofit hospitals whose annual retained earnings routinely exceed $100 million, and their swollen reserves help to finance the medical arms race that's a major factor in health-care inflation. Yet, while some hospitals thrive, those caring mostly for low-income patients are barely getting by.

A different set of haves and have-nots are found with physicians. A running joke in medical schools advises students to follow the ROAD to success -- that is, radiology, ophthalmology or orthopedics, anesthesiology, and dermatology. These specialties offer a gentler life style and fewer emergencies in the middle of the night than other fields of medicine do, and they also enjoy high earnings. Tales of radiologists getting $700,000 and 18 weeks vacation their first year out of residency are not unusual, while seasoned family physicians and general internists make less than $200,000 for working on the front lines.

The point is not to feel sorry for primary-care physicians, who, after all, remain in the top echelon of American earners. Rather, the problem is a mismatch between medical students' career choices and the public's needs. There is already a shortage of physicians and nurses to furnish primary care, and now 34 million more citizens with insurance cards will want to receive those services outside of emergency rooms.

In addition, the first wave of baby boomers will begin entering Medicare next year. Their lives will be, on average, longer and healthier than those of previous generations, but they will also suffer from demanding chronic conditions that require better coordination from more primary-care physicians and nurses.

The Affordable Care Act takes some limited steps to remedy these shortages by providing small increases in pay for primary -- care physicians and general surgeons and requiring state Medicaid programs to reimburse primary-care physicians at Medicare levels, but just for two years -- 2013 and 2014.

These payment changes are a start but hardly sufficient. The act also establishes a national commission to project future needs for the health-care workforce to assist Congress in analyzing spending options. Presumably, the commission could propose changes in payment and other policies to train more generalists. Such shifts would likely meet resistance, however, not only from specialists, who would see their incomes drop, but also from academic health centers oriented toward high-tech medicine.

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Rewarding Better Performance

Some progressive health-care providers have been among the most vocal critics of the Affordable Care Act for its lack of ambitious reform of organization and payment. The leaders of the Mayo Clinic and other top multi-specialty groups have complained that the legislation moves too slowly to promote the kind of care that organizations like theirs are capable of giving. They correctly argue that because insurers pay providers according to the volume rather than the value of services, they are penalized for better performance.

The legislation does support a variety of measures consistent with the integrated approach these progressive health-care providers exemplify. Those measures include broader coverage of preventive services, support of comparative effectiveness research to improve patient and physician decision-making, and uniform adoption of electronic health records. Ultimately, these steps need to be combined with more thorough-going payment reforms to favor integrated systems that take responsibility for their enrollees' health care, even though some patients may choose not to receive all of their care inside the system in which they're enrolled.

In this past year's battle over health reform, the strategic decision to put strong cost containment on the back burner was the right one. The opponents of reform attacked even very modest innovations in the legislation. The same people who raised the specter of "death panels" would have had a field day attacking stronger reforms as "rationing." The prudent and realistic path is to set up extensive testing of new models, to evaluate and document their impact, and to make midcourse corrections in the hope that the time will arrive when the public and the health-care system are both ready for changes that will allow America to do better for less.

About the Author

Robert A. Berenson, M.D., is an institute fellow at the Urban Institute and deputy chair of the Medicare Payment Advisory Commission, which advises Congress on Medicare policy. The views expressed here do not necessarily represent those of the commission.